Markets and Prices
On this page:
In the News and Examples
A Little History: Primary Sources and References
Definitions and Basics
So we have supply, which is how much of something you have, and demand, which is how much of something people want. Put the two together, and you have supply and demand.Microeconomics, from the Concise Encyclopedia of Economics
At the root of everything is supply and demand. It is not at all farfetched to think of these as basically human characteristics. If human beings are not going to be totally self-sufficient, they will end up producing certain things that they trade in order to fulfill their demands for other things. The specialization of production and the institutions of trade, commerce, and markets long antedated the science of economics. Indeed, one can fairly say that from the very outset the science of economics entailed the study of the market forms that arose quite naturally (and without any help from economists) out of human behavior. People specialize in what they think they can do best--or more existentially, in what heredity, environment, fate, and their own volition have brought them to do. They trade their services and/or the products of their specialization for those produced by others. Markets evolve to organize this sort of trading, and money evolves to act as a generalized unit of account and to make barter unnecessary.Demand and Supply, by Dwight Lee. At CommonSenseEconomics.com. Also available: audio.
The Basics of Demand and Supply: Although a complete discussion of demand and supply curves has to consider a number of complexities and qualifications, the essential notions behind these curves are straightforward. The demand curve is based on the observation that the lower the price of a product, the more of it people will demand. There may be occasional exceptions to this behavior (and indeed economists have developed the theoretical possibility of such an exception), but they are so few and transient that economists refer to the negative relationship between price and quantity demanded as the "law of demand." Because of the law of demand, demand curves (such as D in the figure) are always shown as downward sloping, with the price on the vertical axis and the quantity demanded (over some period) on the horizontal axis.Market Clearing, from Amosweb.com's Gloss-orama.
The price and quantity that equates the quantity demanded and quantity supplied; equates the demand price and supply price; and achieves market equilibrium. In other words, the market is "cleared" of shortages and surpluses.Supply, from the Concise Encyclopedia of Economics
One function of markets is to find "equilibrium" prices that balance the supplies of and demands for goods and services. An equilibrium price (also known as a "market-clearing" price) is one at which each producer can sell all he wants to produce and each consumer can buy all he demands. Naturally, producers always would like to charge higher prices. But even if they have no competitors, they are limited by the law of demand: if producers insist on a higher price, consumers will buy fewer units. The law of supply puts a similar limit on consumers. They always would prefer to pay a lower price than the current one. But if they successfully insist on paying less (say, through price controls), suppliers will produce less and some demand will go unsatisfied....Efficiency, Supply and Demand, and Market Clearing, by Arnold Kling
Supply and Demand: Prices play a central role in the efficiency story. Producers and consumers rely on prices as signals of the cost of making substitution decisions at the margin. How are prices determined?
In the News and Examples
Richard McKenzie of the University California, Irvine and the author of Why Popcorn Costs So Much at the Movies and Other Pricing Puzzles, talks with EconTalk host Russ Roberts about a wide range of pricing puzzles. They discuss why Southern California experiences frequent water crises, why price falls after Christmas, why popcorn seems so expensive at the movies, and the economics of price discrimination.Robert Frank on Economics Education and the Economic Naturalist. Podcast. EconTalk, October 15, 2007.
Author Robert Frank of Cornell University talks about economic education and his recent book, The Economic Naturalist. Frank argues that the traditional way of teaching economics via graphs and equations often fails to make any impression on students. In this conversation with host Russ Roberts, Frank outlines an alternative approach from his new book, where students find interesting questions and enigmas from everyday life. They then try to explain them using the economic way of thinking. Frank and Roberts discuss a number of the enigmas and speculate on the future of economics and education. The topics discussed include tuxedos vs. wedding dresses, the level of civility (or lack thereof) in New York City, the difference between vending machines for soda and newspapers, the tragedy of the commons, and the economics of love.Ticket Prices and Scalping. Podcast. EconTalk, July 16, 2007.
EconTalk host Russ Roberts talks about scalping and visits AT&T Park hours before Major League Baseball's All-Star Game to talk with a scalper, a merchandiser, a fan, and the police about prices, tickets, baseball and the law.Don Boudreaux on Energy Prices. Podcast. EconTalk, Aug. 25, 2008.
Don Boudreaux of George Mason University talks with EconTalk host Russ Roberts about the recent surge in energy prices. They talk about why prices have risen, the implications for America's standard of living and the implications for public policy.Roberts on the Price of Everything. Podcast. EconTalk, Aug. 25, 2008.
Russ Roberts, host of EconTalk and author of the economics novel, The Price of Everything, talks with guest host Arnold Kling about the ideas in The Price of Everything: price gouging, the role of prices in the aftermath of natural disaster, spontaneous order, and the hidden harmony of the economic cosmos. Along the way, Roberts talks about novels vs. textbooks and other traditional treatments of economic reasoning.Should everything be traded in markets? Cowen on Liberty, Art, Food and Everything Else in Between. Podcast at EconTalk
0:38-7:41 Intro, books by Cowen. A listener asked: What are the limits of libertarianism, or perhaps the limits of markets? Cowen's "Markets in Everything" posts at MarginalRevolution.com touch on moral and legal codes, politics and voting--not everything should be bought and sold in markets. Zelizer podcast. "Markets take on their meaning because not everything is a market." "What happens when you reject the Aristotelian ideal of moderation?" CDs, iTunes example....Cole on the Market for New Cars. Podcast. EconTalk, June 09, 2008.
Steve Cole, the Sales Manager at Ourisman Honda of Laurel in Laurel, Maryland talks with EconTalk host Russ Roberts about the strange world of new car pricing. They talk about dealer markup, the role of information and the internet in bringing prices down, why haggling persists, how sales people are compensated, and the gray areas of buyer and seller integrity.
A Little History: Primary Sources and References
... Walras's biggest contribution was in what is now called general equilibrium theory. Before Walras, economists had made little attempt to show how a whole economy with many goods fits together and reaches an equilibrium....Alfred Marshall, biography from the Concise Encyclopedia of Economics
Alfred Marshall was the dominant figure in British economics (itself dominant in world economics) from about 1890 until his death in 1924. His specialty was microeconomics--the study of individual markets and industries, as opposed to the study of the whole economy. In his most important book, Principles of Economics, Marshall emphasized that the price and output of a good are determined by both supply and demand: the two curves are like scissor blades that intersect at equilibrium. Modern economists trying to understand why the price of a good changes still start by looking for factors that may have shifted demand or supply, an approach they owe to Marshall....Equilibrium of Normal Demand and Supply, by Alfred Marshall. Book V, Chapter 3 in Principles of Economics
We have next to inquire what causes govern supply prices, that is prices which dealers are willing to accept for different amounts....
Vernon Smith, Professor of Economics at George Mason University and the 2002 Nobel Laureate in Economics, talks about experimental economics, markets, risk, behavioral economics and the evolution of his career.Vernon Smith on Markets and Experimental Economics. Podcast. EconTalk, Mar. 3, 2008.
Nobel Laureate Vernon Smith of Chapman University and George Mason University talks with EconTalk host Russ Roberts about the ideas in his new book, Rationality in Economics: Constructivist and Ecological Forms. They discuss the social and human sides of exchange, the robust nature of equilibrium in experiments and the real world, the seeming contradiction between Adam Smith's two great works, the unpredictability of how innovation emerges and its rationality, what neuroscience might tell us about economic decision-making, and the challenges of small-group intimate exchange and our interactions with strangers in the extended order of the marketplace.
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